This paper is an explanation of the attempt to link a digital asset to an underling commodity without any physical tie to that commodity. Use cases would include digital assets that matched the price of say Gold or Oil without any need to hold that commodity in a physical sense. The solution proposed here is the link between the digital currency issuance (mining) and the underlying asset price.

The need for this technology comes out of the fact that many people would like to have digital assets that match commodities. We see all the time, examples of companies trying to issue digital currencies related to some kind of commodity. But these assets are soon attacked by either Bitcoin users, who understand that linking anything to a physical item is dangerous, or by the company themselves not being able to protect the physical goods. Therefore up until this point, it has been seen as impossible to link anything to a digital currency or vise versa. The power of digital currencies comes from the fact that they are not tied to anything physical, that's what gives them the ability to fly. And those who have tried to link these two things together have met with resistance from governments as well as digital currency users. But what if you could link a digital currency to an asset without actually holding the asset in any shape or form?

As we have seen from the Bitcoin block mining system it is possible to artificially create a price increase from limiting currency issuance. Each time the Bitcoin block reword goes down, there has been a related increase in the Bitcoin price. I propose using a modified mining system to tie a currency to a underlying asset. If the price of the currency is lower then the asset then the block reword is cut off until the price comes back up to meet the asset. And if the currency is higher then the asset, then more coins will be minted each block until the price comes back down. Some might say this price system is too slow to meet the demands of the market. The price will go up and down too fast for the currency issuance to keep up. But I believe that users on the system will attempt to keep the currency matched to the asset as long as they know in the long term the system is designed to reword them for that goal. The price stability system is not really about the mining. The price control comes from the fact that the traders will be keeping the system stable. Because they know what the system is designed to do. They will know that buying coins higher then the asset price is a bad plan and buying coins cheaper then the asset price should reword them in the long run.

How the system works in the long run is of course not known. How traders actually approach such a system in the real world may not reflect what is expected. But that doesn't mean that the system doesn't have value. Perhaps it will be shown that a divergence in currency price compared to the asset price is a sign of something to come. Or a breakdown in agreement. But there should still be some kind of relation in the two assets even if that relationship is not known at this point. The potential of this system not working is contained within a failed coin. And the potential of the system working could result in a wide range of new digital assets and markets.

There are two changes that would need to be added to the Bitcoin or Litecoin program to create this new currency. Let's take a USD tie system as the first example. So the digital currency in this case would be tied to a USD asset. The first change would need to be an API link to a USD feed. This is not really necessary for the USD asset but it should be added non the less for future asset ties, when two different assets are being linked together. The most important tie will have to be linked to an exchange. There needs to be some kind of market oracle that is feeding these miners with info. And as any smart reader will realize this could be open to misuse. However, I think that this can be mitigated by the simple use of a democracy between the miners. The miners will need to agree upon the right info to pull in. And if there is a disagreement, it will be solved by a majority of miners choosing a feed. Once a reliable feed is chosen the problem of the oracle is simply how up to date the market is. If successful, such a coin could allow for new and better decentralized market feeds to evolve in the future to allow more of these digital assets to flourish. Once you have a reliable market feed it's simply a matter of liking the coin's currency issuance to the feed. If the USD price is higher then the coin price, the next block will release no new coins. If the market price of the currency is higher then the asset price, then new coins will be released to the miners in the next system block. The transaction fees in the system should prevent miners from holding back a block to wait for the asset price to be more favorable. Centralized mining systems could hold much more weight over a system like this because they may be able to wait longer for prices to change then say Bitcoin that is not tied to a price.

Known problems can be seen in the areas that are different then that in already running digital currencies. Such as feed issues with the market. Miners having more power in the system. And also dealing with large market swings. For example, if the price of the currency goes way up in the beginning and tons of coins are release into the system, and that is fallowed by a massive market downtrend there would be no way to remove coins from the market the only hope would be a slow rebound in the system back to the asset price. This might result in a environment of very quick uptrend followed by prolonged periods of slow recoveries.